The Bank of England has promised to take action to calm the financial market mayhem that has followed the announcement of major tax cuts by the UK government.
The Bank plans to temporarily buy whatever quantity of long-term debt is required to stabilise the cost of government borrowing, which has skyrocketed in response to Chancellor Kwasi Kwarteng’s new economic plan. The difficulty is that the Bank is also expected to further raise interest rates in order to fight inflation, which will also increase the cost of borrowing, making it harder for the government to stick to its plan.
This latest intervention underlines how intertwined monetary policy – the tools used by a central bank to support a country’s economic growth – is with fiscal policy – the tools used by the government to achieve the same ends. What the government does affects what the Bank has to do and vice versa. It also indicates that either the government or the central bank must consider changing their stated course to address the current economic crisis, or risk continued financial market volatility.
